Apple Isn't Going To Buy ARM, Despite The Market Buzz

London's financial markets are apparently abuzz with gossip that Apple might acquire ARM, the leading maker of mobile chips, with extensive trading of the company's shares. The Register has the story.

Given that Apple has an enormous stack of cash, almost $40 billion including short term securities, and an even higher stock price, and given Steve Jobs' penchant for vertical integration, there has been speculation that Apple might go on a shopping spree.

After being burned when it tried to buy AdMob and was beaten by Google, Apple hired a senior M&A guy -- acquisitions had previously been handled by the executive team on an ad-hoc basis -- and speculation increased.

We don't buy it, however, for the following reasons:

Apple doesn't make big strategic acquisitions. When Apple decided to get into the portable music business, they didn't buy Archos; when they decided to go into the mobile phone business, they didn't buy Motorola. They built the resources from within, with the occasional small acquisition to integrate talent and specific technologies, PA Semi being the canonical example. Apple did acquire Quattro to go into mobile advertising, but it was a small acquisition and a small team, not a multibillion global company like ARM.

It's not in Apple's DNA to integrate large organizations. Acquisitions fail and succeed by how efficiently the acquired is integrated into the company; not just business synergies but cultural synergy: making sure the key people feel at home and don't leave, making sure the teams with members of both companies go along well. It's a subtle and elusive thing, but it's what matters. Most companies don't know how to do this and fail. A few companies understand this and do it very well. Apple has never done it, and its DNA includes a very unique culture which is geared toward integrating individual hires and small teams, not a whole global organization. Steve Jobs is smart and knows Apple's greatest asset is its culture and its people, and he would not risk endangering it by trying to integrate a large foreign organism.

Apple doesn't need the technology. Apple has acquired, and likely will keep acquiring, small chip startups to bring more key technology in-house and wring every possible bit of technology from the silicon it uses by using custom components and not off the shelf ones. But it already has the technology it needs to build its own chips, as evidenced with the A4, that powers the iPad, and the custom silicon inside the so-called Apple 4G's innards.

And last but not least: it doesn't make sense. ARM is a standard for chips for the mobile industry. The most intriguing idea is that Apple would kneecap other mobile handset makers by buying the standard and keeping it to itself. There are two things wrong with this idea (a third might be that it could open lawsuits, but we'll defer to more expert opinion on this one). First of all, there are other really good mobile chip makers besides ARM, like Qualcomm. If Apple buys ARM, another company will become the standard. Apple will have spent a lot of money to annoy handset makers for a year. Great. But the biggest reason is that Apple just doesn't do that. They don't crush competitors by acquiring their partners. They crush competitors by out-designing them, out-marketing them and out-selling them, period.

One company that we think has more legs, if one wants to find an acquirer for ARM, is Intel. Mobile is the biggest growth sector, but Intel largely exited that sector because they couldn't maintain the high margins they get for their computer chipsets. Now as the technology behind mobile chips improves, not only are mobile chips companies tapping into this huge market, they're also starting to eat into Intel's core computer chips business. A netbook today likely has an Intel chip; but a tablet tomorrow might have a mobile chip, as the iPad does. This is the classic innovator's dilemma: a big incumbent dismisses a lower-margin, inferior product which starts in a small segment of the market, but as technology and adoption improve the upstarts eat through the incumbent's core business like cancer.

Intel was born in the crucible of the innovator's dilemma: the company famously ditched its core memory chips business and bet itself on the then-emerging microprocessor, and ended up disrupting bigger incumbents. If Intel remembers its history, it will know that it needs to make a big play in the mobile chip sector, and fast.